State of the Union: Taxes on the 1 percent could fund middle-class tax credits

For Tuesday’s State of the Union address, President Barack Obama will make proposals such as a tax hike for the wealthy, free community college and other ideas that will have little chance of passing a Republican-led Congress.As a first step for politicians looking to address rising inequality in the US, overhauling how capital gains are taxed would seem like a good place to start.

WASHINGTON — Republican lawmakers are already signaling they will do what they can to block President Barack Obama’s pitch for tax increases on the wealthiest Americans. Similarly to the UK, the US tax code favours income generated from rising asset values, such as an increase in share prices, over income generated from work, such as wages and salary. Obama is making that pitch to a huge television audience in hopes of putting the new Republican Congress in the position of defending top income earners over the middle class. Americans pay a top rate of 23.8 per cent tax on their investment income — significantly lower than the top rate of tax on income from employment, which now stands at 39.6 per cent.

And if Republicans say no — especially to catchy-sounding ideas like getting rid of the “trust fund loophole” — they can explain it to voters in 2016. This gap in how different kinds of income are taxed overwhelmingly benefits the wealthiest US households, which are much more likely to hold investments that grow in value over time. The Congressional Budget Office estimated in 2013 that 93 per cent of the benefits from the preferential tax treatment of capital gains flowed to the richest 20 per cent of Americans, and a full 68 per cent of the benefits went to the top 1 per cent.

Tax increases are rarely welcomed by congressional Republicans, who now hold majorities in the House and the Senate for the first time in Obama’s presidency. Altogether, the new tax benefits for middle-class families would cost $175 billion over 10 years, according to senior administration officials — in addition to the $60 billion price tag for the proposal Obama has already announced to make community college tuition free for two years. Obama was true to his promise in issuing an executive order requiring federal contractors to pay workers $10.10 per hour, but said that would’t be enough. “Of course, to reach millions more, Congress needs to get on board,” Obama said. Senior Republicans have already slammed the plan as dead on arrival, and the president knows that the proposals are unlikely to gain traction in a GOP-controlled Congress that believes tax increases would stall business investment and crimp growth. “Raising taxes on people that are successful is not going to make people that are struggling more successful,” said Florida senator Marco Rubio, a possible Republican presidential candidate for 2016.

But he said on ABC’s “This Week” that the president has fallen short by failing to establish close ties to Congress. “Slapping American small businesses, savers and investors with more tax hikes only negates the benefits of the tax policies that have been successful in helping to expand the economy, promote savings and create jobs,” Sen. However, with the US economy now recovering more strongly than most other large, developed economies, Mr Obama believes he has a chance to at least partly recast the national debate on tax. Orrin Hatch (R) of Utah, chairman of the Finance Committee, said in a weekend statement. “More Washington tax hikes and spending is the same, old top-down approach we’ve come to expect from President Obama that hasn’t worked,” said Michael Steel, a spokesman for House Speaker John Boehner. Because I firmly believe when women succeed, America succeeds.” But the White House-backed Paycheck Fairness Act, which made it easier for women to sue their employer for alleged gender discrimination, failed even to pass a Democrat-controlled Senate. For decades, that debate has centred on whether lowering taxes helps to stimulate economic growth, as most Republicans contend, or whether the tax system should be used as a means of transferring wealth from the rich to the less affluent and the poor, mainly in the form of social programmes.

Obama told Congress: “If we are serious about economic growth, it is time to heed the call of business leaders, labor leaders, faith leaders, and law enforcement – and fix our broken immigration system.… So let’s get immigration reform done this year.” Congress did not act on a bill providing a “pathway to citizenship” for 11 million illegals, so after the midterm elections, Obama took executive actions to shield 5 million illegals from deportation. Obama’s speech, the official said, will be about “the choices he thinks we need to make to make sure that that extends to the middle class.” White House officials aren’t holding their breath that Obama’s new proposals will pass Congress now that Republicans control both chambers. Last year, he also called for Congress to make a more modest move. “Both Democrats and Republicans have argued that our tax code is riddled with wasteful, complicated loopholes that punish businesses investing here, and reward companies that keep profits abroad.

Let’s flip that equation,” he said. “Let’s work together to close those loopholes, end those incentives to ship jobs overseas, and lower tax rates for businesses that create jobs here at home.” He went on to say, “Let’s continue that progress with a smarter tax policy that stops giving $4 billion a year to fossil fuel industries that don’t need it, so that we can invest more in fuels of the future that do.” Obama’s Treasury Department took actions against companies that were incorporating abroad to avoid the high U.S. corporate tax rate. New spending initiatives and expensive tax credits aren’t likely to be a big draw for Republicans, either — that’s not what they see as the goal of tax reform. But Congress didn’t pass any law on tax reform. “Research shows that one of the best investments we can make in a child’s life is high-quality early education,” Obama said in 2014. “Last year, I asked this Congress to help states make high-quality pre-K available to every four year-old. But Obama administration officials insist that several of the ideas have drawn bipartisan support in the past, including the bank fees, which are similar to a proposal former House Ways and Means Committee Chairman Dave Camp included in his tax reform proposal last year.

Officials in Mr Obama’s administration believe that figure would rise further still if more people were aware of policies such as the so-called “stepped up basis” loophole, which allows wealthy families to transfer capital gains income tax free between generations. Obama also wants to close what the administration is calling the “trust fund loophole,” a change that would require estates to pay capital gains taxes on securities at the time they’re inherited.

The White House estimates the second earner credit would benefit 24 million couples; the maximum credit would be available to families with incomes up to $120,000. Administration officials pointed to a third proposal from the president as one they hope Republicans would support: a fee on the roughly 100 US financial firms with assets of more than $50 billion. The CBO estimates that by not levying capital gains tax on assets transferred at death, the government will miss out on $644bn of tax revenues between 2014 and 2023. Obama said the Supreme Court undermined the Voting Rights Act, but called on Congress pass proposals of his bipartisan commission. “I appointed last year has offered reforms so that no one has to wait more than a half hour to vote.

And to help with their retirement expenses, he’d require all businesses with more than 10 workers to enroll their workers automatically in an individual retirement account if they don’t offer a retirement plan already. Let’s support these efforts.” “That’s why, working with this Congress, I will reform our surveillance programs – because the vital work of our intelligence community depends on public confidence, here and abroad, that the privacy of ordinary people is not being violated,” Obama said. He also asked Congress for more research and development funding, to expand unemployment insurance, for housing incentives, for trade agreements, for funding for alternative energy fueling stations, and for patent reform. The focus on capital gains and dividends and the effective rate paid by the wealthy revives a debate that dominated the 2012 election — when Democrats hammered Mitt Romney’s relatively low tax rate — which he enjoyed largely because the former private equity executive made most of his wealth from investments.

Under the current Tax Code, administration officials say, someone who inherits $50 million in stock — in a portfolio that was originally worth $10 million — doesn’t have to pay income tax on the $40 million capital gain. The goal, according to one senior administration official, is to punish “the largest and most risky borrowing in the system” that can still hurt middle-class Americans even after the banking reforms that followed the 2008 financial crisis.